'Fiscal cliff' deal brings some relief to California

JUDY LIN

ASSOCIATED PRESS | January 2, 2013

SACRAMENTO — The deal in Washington to avoid the "fiscal cliff" will bring a reprieve to California's slowly rebounding economy, but uncertainty remains in part because Congress delayed action on federal spending cuts.

The agreement helps California avoid sliding back into recession, H.D. Palmer, finance spokesman for Gov. Jerry Brown, said Wednesday. But economic forecasters said the two-month delay on the sequestration cuts could lead businesses to delay hiring or investments.

"To the extent that this agreement averts a national recession — and the revenue loss associated with it — then we will have dodged a bullet," Palmer said a day after Congress reached the deal.

One immediate benefit of the agreement is about 400,000 jobless Californians will receive extended unemployment benefits. The legislation also stops a 27 percent reduction in Medicare fees paid to doctors, and keeps in place a higher child tax credit as well as tax credits for college tuition, clean energy and small businesses.

While it raises taxes on the wealthy, the deal prevents most tax increases on the middle class. All taxpayers will be subject to an additional 2 percent Social Security payroll tax because Congress allowed that tax holiday to expire.

Individuals making $400,000 or more and couples making $450,000 or more will see an increase in their tax rate to 39.6 percent, up from 35 percent.

About 144,000 of the state's 14.6 million tax returns, or 1 percent, reported incomes of $400,000 or more, according to 2009 statistics from the California Franchise Tax Board, the latest data available.

Forecasters had predicted California would fall back into recession if all the federal tax breaks were allowed to expire and government spending was slashed.

Some observers still fear the two-month delay in negotiations about spending and the federal debt could cause businesses and investors to hold back.

"Part of the fiscal cliff was postponed for two months, so it's still there," said Jerry Nickelsburg, economics professor at the UCLA Anderson School of Management. "We just changed it from one fiscal cliff into two."

The Los Angeles County Economic Development Corp. projected that automatic spending cuts would have brought a loss of $22.7 billion in gross state product — the annual measure of goods and services produced in California. It also could have meant the loss of 225,000 jobs statewide.

Kimberly Ritter-Martinez, associate economist at the organization, said the 2 percent payroll tax could still mean fewer movies and dinners out for many families, while higher taxes on the wealthy could mean they have less money to invest or spend.

The changes "seem like they're small or affecting just a small number of people, but each one of these things has an impact and it can multiply throughout the economy," Ritter-Martinez said.

State experts said it will take weeks to study the impact of the federal legislation on California's economy and state budget.

The nonpartisan Legislative Analyst's Office warned that California also could have lost as much as $11 billion in tax revenue if the nation fell back into recession. That would wipe out the bulk of tax gains under Proposition 30, a set of temporary sales and income taxes hikes voters approved in November.

The state relies heavily on high-income earners, who now will be hit with multiple tax increases — at the state level under Proposition 30 and on the federal level because of the expiring Bush-era tax cuts. The analyst's office had projected a much smaller deficit of $1.9 billion for the next fiscal year on the assumption that Washington would avoid the fiscal cliff.

Additional data will be available as taxpayers make estimated payments this month and begin filing final returns or making extension payments between now and April.

"It will take months, in other words, to understand this aspect of the fiscal cliff better," said Deputy Legislative Analyst Jason Sisney.

On Wednesday, the California Employment Development Department said the state should be able to avoid an interruption to unemployment benefits if federal lawmakers don't make any significant changes.

Dr. Paul Phinney, president of the California Medical Association, said the fiscal cliff deal brought a mixed blessing to physicians, a vast majority of whom accept Medicare.

"We're pleased that they did that but the last-minute deals like this are really disruptive to practices and to continuity of care," Phinney said. "There are a lot of physicians that have spent the last several weeks trying to figure out what they were going to do if these cuts would have gone into effect."